Last updated: February 14th, 2020 4:00 PM

Section 35D Deduction - For Preliminary Expenses

Section 35D of the Act was introduced to provide entrepreneurs with the facility to claim deductions for preliminary expenses. Preliminary expenses are expenses which the promoters of a company incur at the time of incorporating the company. Generally, preliminary expenses are disallowable on the ground that they are of a capital nature or incurred prior to the setting up of a business. However, to provide incentives to entrepreneurs who are spending their own money for incorporating a business enterprise, the Government introduced Section 35D of the Income Tax Act. The present article provides an explanation of Section 35D.

Eligibility for Claiming Section 35D Deduction

Section 35D deduction can be claimed by an Indian Company or by a person other than a company who is resident in India. The expenses that can be claimed as a deduction under Section 35D must pertain to:

1. Expenditure incurred before the commencement of business.
2. Expenditure incurred after the commencement of business in connection with the extension of existing undertaking or in connecting with setting up a new unit.

Expenses Deductible under Section 35D

The following expenses are qualified for deduction under Section 35D:

1. Expenditure incurred in connection with:
   • Preparation of a feasibility report.
   • Preparation of a project report.
   • Conducting a market survey or any other survey necessary for the business of the assessee.
   • Engineering services relating to the business of the assessee.
2. Legal charges for drafting any agreement between the assessee and any other person relating to the setting up or conduct of the business of the assessee.
3. Where the assessee is a company, also, expenditure:
   • By way of legal charges for drafting the MOA / AOA or printing of MOA / AOA.
   • Incorporation fee.
   • For issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.
   • Other expenses as notified by the Government from time to time.

Amount Deductible under Section 35D

The maximum deductible under Section 35D cannot be over 5% of the cost of the project. In the case of a company, the maximum deduction cannot exceed 5% of the cost of the project or the capital employed in the business of the company. The amount qualifying as deduction as per the limit will be allowed as a deduction in 5 equal annual instalments beginning with the previous year of commencement of business or the previous year in which the extension of an industrial undertaking is completed or the new industrial unit commences production or operation. To know about the concept of tax audit turnover in Income Tax, click here.